FINANCIAL STATEMENT

ANALYSIS
Presented by: Sameera Mansoor
Sameera.mansoor@wits.ac.za
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 OBJECTIVE
After the lecture you should be able to:

• Explain the objectives and identify the users of financial statement analysis

• Identify the various reports used to communicate financial information to stakeholders

• Understand the different approaches to conducting a financial statement analysis

• Calculate and interpret financial ratios to evaluate performance

• Understand identify other factors to consider when analysing a company

• Explain the limitations of financial statement analysis

•Please note the list of learning objectives given each week per topic are not exhaustive, as there are various links between topics. Students

should ensure that they are comfortable with all concepts tested in the tutorials, question bank questions and past papers and should use this

list to establish whether they have achieved the basic learning objectives

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OBJECTIVE OF FINANCIAL STATEMENT
ANALYSIS Why is it important to also
consider non financial
information and where do
we find it?

• The objective of financial statement analysis is to examine and evaluate a company's

financial statements to gain insights into its’ financial and non financial performance.
• Involves a systematic review and interpretation of financial data to assess the company's
past, present, and potential future performance.

WHY?
• A tool used by stakeholders to understand the overall health of a company for decision
making purposes.

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 Users of financial statement analysis
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Who are the users of financial statements? Do you think they all require the same information from a financial
statement analysis?
Overall assessment of the company’s health and growth
potential.

Does the company have the ability to generate

enough cash flows for debt repayment?

Do I have job security? Are there new training and

development projects?

Comparison of actual performance against budgeted

targets and
Identification of areas for improvement and strategic
decision-making

To provide reasonable assurance on the financial

statements.

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Reports used to communicate financial and-

non financial information to stakeholders
A. Annual financial statements
• Statement of financial position
1. Shows the company's assets, liabilities, and shareholders' equity at a specific date.
2. Provides information about the company's financial position and its ability to meet its financial obligations.

• Statement of comprehensive income

1. Presents the company's revenues, expenses, gains, and losses over a specific period.
2. Indicates the company's profitability and net income.

• Statement of cash flows

1. Reports the cash inflows and outflows resulting from operating, investing, and financing activities during a specific period.
2. Helps assess the company's liquidity, cash flow management, and ability to generate future cash flows.

• Statement of changes in equity

1. Shows the changes in shareholders' equity during a specific period.
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2. Provides information about the sources and uses of equity, including net income, dividends, and additional investments.
 Reports used to communicate financial and-
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non financial information to stakeholders

B. Integrated report
• Aims to provide a holistic view of a company's
value creation process, combining financial and
non-financial information.

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 Approaches to Financial statement analysis
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Index Common
Comparative Ratio analysis
analysis size analysis

-Prior year -Based on

-Industry Scoped Scoped financial

information
standards
-competitors
out out -Calculate and
interpret

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 Financial Analysis ratios
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Profitability ratios

Liquidity ratios

Capital structure and solvency ratios

Return on invested capital

Financial market ratios

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 Profitability ratios

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 Liquidity ratios

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 Capital structure and solvency ratios

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 Return on invested capital ratios

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 Financial market ratios

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Interpretation of the ratios

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Other factors to consider
Non financial information
Outside factors
Limitations of financial
statements
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• Can be found in the integrated report.
• Corporate Governance
• Sustainability and environmental impact
• Social impact and CSR
• Regulatory, compliance and legal matters
• Economy
• Industry
• Demand for product or service
• Financial Statements can easily be manipulated.
Stakeholders should make use of audited financial
statements.
• Ignores inflation
• Please refer to text book handout for further limitations
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